Insurers: New Tools To Remove CAFA Cases To Fed. Court

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: Insurers: New Tools To Remove CAFA Cases To Fed. Court Law360, New York (May 25, 2012, 1:36 PM ET) -- Insurance companies often presumptively seek to avoid state courts because they perceive that state court litigation entails confusing procedures, provincial judges and overly generous and unpredictable juries. As a result, after service of a state court complaint, many defendant insurers immediately seek to remove their case to federal court. For the rising number of complex state court class action cases asserted against insurers, the inclination to avoid a state court venue is even more pronounced. In light of the U.S. Supreme Court s decision in Wal-Mart Stores Inc. v. Dukes, which required stricter commonality amongst class members and will likely lead to smaller classes, the question of whether cases can be removed to federal court based on the jurisdictional amount in controversy has potentially become an even more critical threshold issue for insurers litigating class action lawsuits. Until recently, federal circuits had adopted three main approaches for addressing this issue, which they applied equally to cases removed under either diversity jurisdiction, 28 U.S.C. 1332(a) or the Class Action Fairness Act (CAFA), 28 U.S.C. 1332(d). However, the Federal Courts Jurisdiction and Venue Clarification Act of 2011 clarified the means by which courts determine the jurisdictional minimum amount in dispute for diversity-based federal subject matter jurisdiction, by adopting a preponderance of the evidence standard. The act effectively overrules the circuits that required defendants to establish to a legal certainty that plaintiffs could recover more than the jurisdictional minimum. This has made removal easier for defendants. Although the Jurisdiction and Venue Act is silent with respect to cases removed under CAFA, logic dictates that the preponderance of the evidence standard for determining the amount in controversy should apply to CAFA cases as well. Thus, insurers looking to remove CAFA cases in circuits that historically have applied the legal certainty test should advocate for the adoption of the act s preponderance of the evidence standard. Circuits Adopted Disparate Approaches In Removal Contests Prior to the recent adoption of the Jurisdiction and Venue Act, the federal circuits had developed three different approaches to determining whether a complaint satisfied the $75,000 jurisdictional minimum for diversity cases, or the $5 million minimum required under CAFA. Significantly, the approach adopted by a particular court applied equally in the diversity and CAFA contexts.

2 The first approach adopted by the U.S. Court of Appeals for the Ninth Circuit and followed by a number of other circuit courts (hereafter, the Ninth Circuit test) applied different burdens depending on the damages pled, or not pled, by the plaintiff. Where a plaintiff s complaint specifically identified damages below the jurisdictional minimum, the defendant was required to show to a legal certainty that the amount in controversy exceeds the statutory minimum. Lowdermilk v. U.S. Bank Nat l Assoc., 479 F.3d 994 (9th Cir. 2007). The legal certainty standard deferred presumptively to plaintiffs own identification of the amount in controversy, and therefore significantly tipped the jurisdictional scales in their favor. See, e.g., Morgan v. Gay, 471 F.3d 469 (3d Cir. 2006) (applying legal certainty standard where class plaintiff expressly limited damages to less than $5,000,000 CAFA threshold); Burns v. Windsor Ins. Co., 31 F.3d 1092 (11th Cir. 1994) (deferring to plaintiff s specific demand in diversity case and requiring defendant to prove to a legal certainty that plaintiff's claim must exceed the jurisdictional minimum). Alternatively, where class plaintiffs failed to specify a damage amount in their complaint, the Ninth Circuit test applied the preponderance of the evidence standard, such that the defendant was required to show that the amount in controversy more likely than not could exceed the minimum. Guglielmino v. McKee Foods Corp., 506 F.3d 696, 699 (9th Cir. 2007). Lastly, where plaintiffs demanded more than the jurisdictional minimum, the Ninth Circuit test held that the amount in controversy was presumptively satisfied, unless an objecting plaintiff could show to a legal certainty that the class could not recover more than the minimum. Id. The second approach, adopted by the Seventh Circuit (the Seventh Circuit test), relied upon the Supreme Court s opinion in St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283 (1938) to hold that the estimate of the dispute s stakes advanced by the proponent of federal jurisdiction controls unless a recovery that large is legally impossible. Back Doctors Ltd. v. Met. Prop. And Cas. Ins. Co., 637 F.3d 827, 830 (7th Cir. 2011). Only jurisdictional facts, such as which state issued a party s certificate of incorporation, or where a corporation s headquarters are located, need be established by a preponderance of the evidence. Id. Moreover, unlike most jurisdictions, the Seventh Circuit does not construe the removal statutes to limit federal jurisdiction. Id. ( There is no presumption against federal jurisdiction in general, or removal in particular. ). The Seventh Circuit and other courts adopting its test did not vary the test if plaintiff demanded a specific sum in damages. Hartis v. Chicago Title Ins. Co., 656 F.3d 778 (8th Cir. 2009). In effect, the Seventh Circuit test required the defendant to prove the underlying facts such as the size of a class by a preponderance of the evidence, but then effectively shifted the burden to the plaintiffs to disprove that their damages could exceed the minimum. See Spivey v. Vertrue Inc., 528 F.3d 982, 986 (7th Cir. 2008) ( Once the [defendant] has explained plausibly how the stakes exceed $5 million, then the case belongs in federal court unless it is legally impossible for the plaintiff to recover that much. ) This burden shift is even more noticeable in the Eighth Circuit, which adopted a slight variation of the Seventh Circuit test: [o]nce the removing party has established by a preponderance of the evidence that the jurisdictional minimum is satisfied, remand is only appropriate if the plaintiff can establish to a legal certainty that the claim is for less that the requisite amount. Bell v. Hershey Co., 557 F.3d 953, 956 (8th Cir. 2009).

3 The last major approach, adopted by the First Circuit (the First Circuit test), applied the functionally equivalent preponderance of the evidence or reasonable probability standards, without regard to burden shifting. See, e.g., Amoche v. Guarantee Trust Life Ins. Co., 556 F.3d 41 (1st Cir. 2009); Blockbuster Inc. v. Galeno, 472 F.3d 53 (2d Cir. 2006). Under the First Circuit test, the defendant must provide evidence, or use plaintiff s complaint, to establish that it is more likely than not that the amount in controversy exceeds the statutory minimum. This approach arguably was adopted, in part, by the recent amendments to the removal for diversity jurisdiction, and thus it likely will find broader acceptance within the circuits for CAFA cases. The Jurisdiction and Venue Act Resolves the Circuit Split for Diversity Cases The Jurisdiction and Venue Act, which amends 28 U.S.C. 1446, establishes one standard for determining the amount in controversy for diversity cases under 28 U.S.C. 1332(a). The amendments state that the sum demanded in good faith in plaintiff s complaint shall be deemed to be the amount in controversy. See 28 U.S.C. 1446(c)(2). Thus, if plaintiffs demand the specific sum of $72,000 in their complaint, a defendant cannot challenge the amount in controversy on grounds other than bad faith, which would seem to limit defendants ability to remove cases to federal court. However, the Jurisdiction and Venue Act provides significant exceptions that, in practice, swallow the rule. Plaintiff s demand is not deemed to be the amount in controversy when: 1. The complaint requests nonmonetary relief; 2. State practice prohibits plaintiffs from demanding a specific sum (for example, Louisiana); or 3. State practice permits recovery of damages in excess of the amount originally demanded in the complaint. See 28 U.S.C. 1446(c)(2)(A). In those circumstances, the defendant may prove the amount in controversy by a preponderance of the evidence. See 28 U.S.C. 1446(c)(2)(B). Although not addressed in the statute, another exception arguably arises when a court cannot discern the specific amount in controversy from the face of the complaint because the demand is ambiguous. In effect, the preponderance of the evidence standard now will apply in nearly every case in which the jurisdictional minimum is at issue, because: 1. Many plaintiffs demand nonmonetary relief; 2. Nearly all states either prohibit pleading specific damage amounts or do not limit a plaintiff s recovery to the amount demanded in his complaint; and 3. Few plaintiffs demand a specific amount. The changed statutory scheme, therefore, accomplishes at least four objectives: 1. It limits the circumstances when different standards apply to plaintiffs of different states because of the state s differing pleading practices; 2. It estops plaintiffs from opposing federal jurisdiction on the grounds that they overstated the amount in controversy in their own complaint;

4 3. It prevents plaintiffs from demanding artificially low damages to avoid removal, only to obtain higher damages at a state court trial; and 4. It requires the court to use a preponderance of the evidence standard when the parties dispute the amount in controversy, thereby effectively overruling the Ninth Circuit s legal certainty standard and generally resolving the circuit split. Insurers Likely Have an Opportunity to Lower Their Burden in CAFA Cases Unfortunately, U.S. Congress did not explicitly extend the Jurisdiction and Venue Act to cover cases removed under CAFA. Thus, plaintiffs could argue that the Ninth Circuit s legal certainty test - which presents a high bar for insurers to clear in removing cases to federal court remains in those jurisdictions that have adopted it, for purposes of CAFA. However, insurers seeking to remove class actions have a strong argument that the Ninth Circuit s legal certainty standard has been overruled by Congress, and the standards of the Jurisdiction and Venue Act extended to CAFA cases. Federal courts have historically relied upon the same precedent and standards to determine the amount in controversy for both diversity and CAFA cases. The amendments in the Jurisdiction and Venue Act should not undermine that logical consistency. Nothing in CAFA s history justifies a stricter amount in controversy standard, and it makes little sense to use two different standards sometimes in the same case to formulate the amount in controversy when the only real difference is the jurisdictional minimum ($75,000 or $5,000,000). Furthermore, the legal certainty standard contradicts the congressional goals encompassed in the Jurisdiction and Venue Act, and should cease to find a place within CAFA jurisprudence. The Ninth Circuit test provides a strong presumption in plaintiffs favor, but applies no check upon plaintiffs subsequent ability to recover damages in state court that far exceed their original demand. It permits plaintiffs to game the system and defeat federal jurisdiction by demanding a sum below the minimum, only to recover more in the majority of states, which do not limit recovery to the demand amount. The Ninth Circuit test also causes small differences in state pleading rules to unfairly impact federal jurisdiction, because the Ninth Circuit s legal certainty standard only applies when plaintiffs plead a specific monetary demand, which is barred by some states rules. To apply a universal standard in CAFA cases, a court likely would apply the preponderance of the evidence standard articulated by the First Circuit in Amoche. The Seventh Circuit s articulation is slightly more favorable toward insurers, and it is referenced in a committee report for the Jurisdiction and Venue Act. However, the final amendments to 1446 more closely mirror the First Circuit s preponderance test rather than the Seventh Circuit s. Compare 28 U.S.C (containing no language regarding legal impossibility, nor any burden shift to allow plaintiff to rebut a court s finding). Regardless, either the First Circuit or Seventh Circuit test will help alleviate an insurer s burden and should be pursued.

5 While no federal court has addressed, in a public opinion, whether the legal certainty test eliminated by the Jurisdiction and Venue Act should survive in CAFA cases, a reasoned analysis suggests that it should not. Therefore, insurers may want to challenge the outmoded legal certainty standard in CAFA cases to achieve easier removal. --By Peter B. Moores, Choate Hall & Stewart LLP Peter Moores is a partner in the insurance and reinsurance group in Choate Hall & Stewart's Boston office. The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. All Content , Portfolio Media, Inc.